Thayer Consultancy Background Brief

ABN # 65 648 097 123

Impact of the U.S. Mexico
Canada Agreement on Vietnam
October 2, 2018

We are preparing a report on the United States-Mexico-Canada Agreement (USMCA)

and request your assessment of the following issues:
Q1. Does the deal have any implications for economies around Asia? There were deals
regarding garments and retail in the USMCA, for which Mexico will likely be a big
winner, but will South East Asian countries like Vietnam lose out on some market
share?
ANSWER: NAFTA has been in place since 1994, so the effects of most of the “new”
United States-Mexico-Canada Agreement (USMCA) have already been absorbed in
Southeast Asia. The final text of the USMCA has not been released. Media reports have
focused on major areas of disagreement such as auto exports and dairy products and
these new changes should have negligible impact on Southeast Asia.
Regarding garments, a Fact Sheet issued by the U.S. Trade Representative’s Office
indicated the USMCA requires that sewing thread, pocketing fabric, narrow elastic
bands and coated fabric used in apparel and other finished garments must come from
USMCA members. Under NAFTA these items could be imported from the Latin
American region. This could have impact on Vietnam if these restrictions are
incorporated into the USMCA.
Another issue relates to Trade Preference Levels (TPLs) that under NAFTA allowed
yarns and fabric to be imported duty free into the U.S., Mexico and Canada from the
region. The U.S. wanted TPLs eliminated in the USMCA. This would impact mainly on
Latin America. But the status of TPLs is unclear until the text of the agreement is
released to the public.
Q2. What about looming issues like steel and aluminum? This will be agreed between
the three parties in a later deal, but President Trump made it clear he's going to work
to defend .S. steel and aluminum. Will this worry Asian producers?
ANSWER: Media reports indicate that current U.S. tariffs on steel and aluminum are
not included in the USMCA and the 25 percent tariff will remain unless quotas on steel
and aluminum are set in the USMCA. Vietnam is the subject of U.S. tariffs on aluminum
and steel because it imports steel from China and finishes it for export to the US
among other places. At present the burden is on Vietnam to prove its steel does not
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originate from China. Regional states in Asia that import from China and re-export to
the U.S. should be concerned.
Q3. There is a strange clause that says the whole deal could be cancelled if a party
makes a deal with a "non-market economy", which has implications for China. Would
this technically affect any others in South East Asia, such as Vietnam?
ANSWER: Prior to the Trump Administration, the U.S. designated Vietnam as a non-
market economy and the U.S. and Vietnam also have a bilateral trade agreement
(BTA). Vietnam has requested the Trump Administration to change its status to a
market economy and this is the subject of on-going negotiations. Vietnam also has
indicated its willingness to revisit the BTA with the United States. The real crunch could
come when the Trans-Pacific Partnership 11 takes effect in January 2019. Mexico and
Canada are member, Vietnam is a member and a non-market economy. But China is
not part of the TPP-11.
The U.S. could accept the participation of Canada and Mexico in the TPP 11 and not
sanction them for participating in a free trade agreement with a non-market economy
as trade agreement the TPP-11 was negotiated prior to the USMCA and it is
multilateral not bilateral.
Current U.S. legislation provides for sanctions against countries that purchase
weapons from Russian entities. Secretary of Defense James Mattis has supported
exemptions for Vietnam and India and this needs approval from Congress.
The clause in the USMCA about a non-market economy is aimed at putting pressure
on China and preventing it from striking separate deals with Canada and Mexico (and
conversely preventing Canada and Mexico from negotiating BTAs with China). If
Vietnam is strategically important to the U.S. Defense Department, it would appear
unlikely that the United States would withdraw from the USMCA because Canada and
Mexico were trading with Vietnam, a non-market economy, under the framework of
the TPP-11.

Suggested citation: Carlyle A. Thayer, “Impact of the U.S. Mexico Canada Agreement
on Vietnam,” Thayer Consultancy Background Brief, October 2, 2018. All background
briefs are posted on Scribd.com (search for Thayer). To remove yourself from the
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Thayer Consultancy provides political analysis of current regional security issues and
other research support to selected clients. Thayer Consultancy was officially
registered as a small business in Australia in 2002.